Officials tell Osborne a further £65bn of cuts needed by 2061 to avoid 'unsustainable' debt spiral

Britain will need another £65billion in tough austerity measures to manage the impact the ageing population has on its already-creaking public finances, the tax and spending watchdog has warned.

In its annual fiscal sustainability report, the Office for Budget Responsibility (OBR) said extra tax hikes or spending cuts will be needed from April 2018 to keep finances under control until 2061.

This comes on top of George Osborne's £123billion, seven-year fiscal consolidation programme, which includes hundreds of thousands of public sector job losses, an overhaul of the welfare system and a higher pension age.

Debt squeeze: The Chancellor is struggling to meet deficit reduction targets as the economy falters.

The ageing population is the key driver behind the pressure on public finances, as spending on health care and pensions increases, while dwindling tax revenues from sources such as North Sea oil interests could also have an impact.

The graph below shows when we pay tax in our lives - the grey line - and when we make the most financial demands on the government, with the peak at age 85. Today's giant wave of post-war baby boomers are aged 50 to 65, suggesting the biggest burden on taxpayers is still decades away.

The OBR report said: 'In the absence of offsetting tax increases or spending cuts this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory.

'It is likely that such a path would lead to lower long-term economic growth and higher interest rates, exacerbating the fiscal problem. The UK, it should be said, is far from unique in facing such pressures.'

The OBR said the budget balance, the difference between revenues and spending, is currently projected to move from a surplus of 1.7 per cent of GDP in 2016-17 to a deficit of 2.6 per cent of GDP in 2061-62. To maintain the surplus of 1.7 per cent, a further £65billion in spending cuts and/or tax hikes is needed.

Give and take: the ages at which we pay in and pay out

The graph shows when we pay tax in our lives (the grey line) and when we make the most financial demands on the government, peaking at age 85. Today's post-war baby boomers are aged 50 to 65.

To avoid slipping into a budget deficit by 2061-62, or in other words to break even, the Government would need a further £39billion in austerity measures.

In other measures, the OBR said the Government would need to impose a permanent tax increase or spending cut of £17billion in the financial year 2017-18 to get debt back to pre-financial crisis levels of 40 per cent of GDP.

The OBR said the main pressures on public finances come from age-related spending. Health spending is projected to rise from 6.8 per cent of GDP in 2016-17 to 9.1 per cent of GDP in 2061-62, rising smoothly as the population ages.

State pension costs are projected to increase from 5.6 per cent of GDP to 8.3 per cent of GDP as the population structure ages and state second pension entitlements mature.

Key pressures from Britain's 'demographic bulge'

Health spending rises from 6.8 per cent of GDP in 2016 to 9.1 per cent of GDP in 2061, but if health spending rises at 3.6 per cent, as the OBR thinks is possible, then state health spending would be 16.6 per cent of the total economy;

State pension costs will increase from 5.6 per cent of GDP to 8.3 per cent;

Social care costs rise from 1.1 per cent of GDP in 2016 to 2 per cent.

Growing old: How Britain's demographic make-up is set to be transformed in the next 50 years with over-55s making up nearly 40% of the population compared to less than 30% today

Countries with the least and most debt in 2009 and 2016

Japan will have the worst debt problem, relative to the total size of its economy (GDP) in 2016 while Norway will be sitting on a huge surplus

Countries where debts are growing fastest

Countries where the situation has worsened in the past year. These movements in IMF forecasts for general government net debt
between April 2011 and April 2012